Goods and Services Tax (GST) had a significant impact on the Real Estate Sector. Before the pre-GST period, purchasers and developers in India's real estate market were complex. This is because they had to cope with multiple indirect taxes, including Value Added Tax (VAT), Entry Tax, Octroi Tax, Central Excise Tax, and service tax. This not only made property purchases more challenging but also increased the transaction's complexity. However, this sector has been positively impacted by the implementation of GST. Read the article in detail to know the GST impact on real estate sector.
Why Real Estate GST needed changes?
Several factors necessitated a change in the country's tax system, the impact of which can be felt in the real estate sector. Some of these have been given below:
1. The problem of cascading taxes, or the tax on tax situation that imposed a financial burden on real estate developers and home buyers during development and purchase, had to be addressed.
2. Tax rates were not uniform across state lines, causing compliance challenges for many completed and under-construction projects.
3. There was a lack of transparency in the tax system, which led to homeowners being duped by unethical industry practices.
4. Finally, there was no exemption from the VAT and service tax levied in the form of a rebate.
The real estate sector has been developing at a pace of 20% per year, accounting for around 6% of the country's GDP and economic growth. Therefore, it was important to create some transparency and a single comprehensive tax system to make things easier.
Changes to the country's taxation system- (GST)
The implementation of the Goods and Services Tax (GST), which subsumed taxes like VAT, service tax, octroi charges, and others, on July 1, 2017, finally solved the problem of multiple taxes and their cascading impact. Input Tax Credits on inputs, capital goods, and input services were another benefit of GST.
GST Impact on Real Estate Sector
The positive impact of GST on real estate sector:
GST had a major impact on the real estate sector. The positive effects of GST on real estate have been given in detail below:
- GST increased transparency in the real estate industry and reduced unethical dealings.
- Different contractors charged VAT and Service tax, excise duty, entry tax, and octroi were paid on procurements under current tax rules. By eliminating these taxes, the GST law raised the margin in the hands of the contractor/developer.
Now, whether this benefit is passed on to the end-user is unknown, as real estate price is determined by market forces rather than costing principles. The real estate sector benefits greatly from Special Economic Zones in India or SEZ advantages, which are expected to be carried over into GST. GST on real estate aids in closing the massive holes that currently exist in the supply chain management process.
Developers, builders, and contractors will be affected
- Earlier, there were several taxes such as Excise duty, VAT, Customs duty, Entry taxes, and other taxes on raw materials and inputs.
- Service tax was required for various input services such as approval fees, architect professional fees, labour charges, and legal fees, among other things, under the former tax regime, which the developers had to pay.
- For taxes such as Central Sales Tax (CST), Customs duty, and Entry Tax, ITC was not available. This would have an impact on pricing, and the buyer would bear the burden as a result.
Un der GST on real estate, developers’ construction costs are significantly reduced as multiple taxes are subsumed due to the availability of input tax credit. Also, a reduction in the price of logistics will be an added benefit. Hence, developers may s ee improvement in margins.
On the downside, developers have to do multiple calculations to arrive at ITC to pass it on to the buyers. Hence, in most cases, they can pass on the ITC only during the final stages. This lack of transparency on ITC may affect the developers since buyers may resort to a “wait and watch” approach and defer buying decisions.
Furthermore, under the previous laws, a considerable part of expenditure went unaccounted for. Under GST, the availability of credit on inputs has decreased the expense rate for the various costs mentioned above.
GST on Property Sale
GST Real Estate: Advantages for Buyers
- Buyers of houses under construction were required to pay VAT, service tax, registration fees, and stamp duty under the previous taxation scheme.
- On the other hand, developers of properties did not receive any credit for other duties that they were required to pay, such as sales tax (CST), customs duty, OCTROI, and so on.
- Under the GST, GST for property under construction is taxed at a single rate of 12%.
- The GST is not applied on ready-to-move-in properties, as it was under the old tax regime, which is highly favourable to buyers because prices have dropped dramatically.
- Buyers will have to wait and see how the GST affects home prices in the short term before making a choice. If developers pass on the input tax credit to buyers, long-term buyers may gain.
- A purchaser can benefit from an input tax credit when the property is purchased for business purposes from a registered entity. The purchaser is liable to an additional 10% of GST and can receive the same in terms of ITC.
GST Real Estate: Other Stakeholders' Impact
The impact on associated services such as labour, material suppliers, and service providers is determined by the amount of tax paid on these items and services. This will have ramifications for the real estate industry as a whole. Cement, for example, was formerly taxed at a rate of 27-31% but will now be taxed at 18%. An increase in cement costs will increase the overall building cost. The following are the GST rates for some of the commodities used in the construction industry:
Rate of GST
Marble and Granite
Sand and Fly ash bricks
Benefits of GST on Real Estate Sector
- More Transparent
For real estate brokers and everyone else engaged, the new regime means more transparency and accountability. As a result, buyer confidence has increased, which has been advantageous to the sector.
- Advantages for Renters
An exemption has been granted from GST to the residential properties that are used for rental purposes. Also, the maintenance charges will be leviable to GST on Real Estate only if they are more than Rs. 7500 per month per member. This has helped the rental real estate industry to grow in popularity.
- A preference for built-in properties
The immediate impact of GST was for homebuyers to select already existing residences because they proved to be more affordable as the cost of construction and under-construction properties soared. However, as the tilt has remained, the ratio of people picking the latter over the former has shifted.
Although the new GST regime has a few flaws, it has benefited the real estate market, developers, and homeowners in the long run. Buyers should always use caution when making real estate decisions, and selecting a reputable developer is the first step.
Also Read: GST Impact on Gold & Gold Jewellery Prices
Non Applicability of GST for real estate
- GST applied to the plot
While the selling of plots is exempt from the GST regime, any construction on the plot would be subject to the tax. In the event that such a plot is sold, one-third of the plot's value will be deducted, and GST on real estate will be charged on the remaining two-thirds of the land's value.
- Land transactions are exempt from the GST
Because the land sale does not include the transfer of any goods or services, it is likewise exempt from the GST on construction services. Because the land cost is such an essential component in determining property values, GST on real estate provides a standard abatement of 33% of the entire contract value for taxable real estate transactions to be applied to the land cost.
- GST is not applicable for move-in properties
GST does not apply to properties that are ready to move in. It only applies to properties that are under development. 'Work contracts' determine the tax rate that applies to a property building. This is why a developer cannot levy GST on the sale of ready-to-move-in properties. A property is classified as ready-to-move-in after completing and receiving the occupancy certificate, and the work contract no longer covers it. In other words, the GST on real estate would be imposed on the sale of under-construction properties that have not yet received their occupancy certificates.
- Stamp Duty's Applicability
Stamp duty and registration fees are not included in the GST calculation for the time being. However, the Stamp duty will still be charged on both the completed and under-construction properties, same as before GST.
Also Read: What was the impact of GST on Real Estate?
The GST Impact on Real Estate Sector has been immense. Earlier, there were multiple taxes on the real estate sector such as VAT, Entry Tax, Octroi Tax, Service Tax, etc. With the introduction of GST, all these taxes were submerged into one tax, i.e. GST. Notably, the reduction of GST rates on real estate has led to a huge impact. Although the new GST regime has a few flaws, it has benefited the real estate market, developers, and homeowners in the long run. There have been many positive impacts of GST on Real Estate Sector.
We hope the article has given you the relevant information about the GST on Real Estate Sector and its positive impact. For further updates relating to Real Estate GST, download the Khatabook app.